Alex Canahuate

You certainly raise good points. Unfortunately, logic doesn't always dictate the markets (especially precious metals) and further doldrums and/or a move lower are not impossible - however, a break out to the upside given the underlying fundamentals and ongoing strikes in South Africa certainly seems more likely than a breach of the historical support provided by the $1,350 to $1,400 price range.

The cost of production argument is certainly an intriguing component of the platinum space, however as referenced it is a tricky figure to pin down and doesn't seem to wield as significant an influence on prices as one would expect. As a result of the ambiguity surrounding a precise, global average cost of production (at least given my efforts to locate such a figure and without going through the arduous task of pulling data out of public financial filings and comparing the figures from various public mining companies, etc.) this dynamic cannot be unilaterally counted on to buoy platinum prices in the face of shifting sentiments and a falling price - it is more of a medium- to long-term consideration that will surface after extended periods of sub-cost-of-production prices and the negative implications begin showing up in mine company financial filings.

However, as you indicate, it does help tip the scales in favor of a rally at viable inflection points (as we may be currently witnessing).

The BOJ's policy statement indicated that its new stimulus program, slated to commence in January 2014, will include 10 trillion yen worth of monthly purchases of T-Bills. However, the problem with the BOJ printing yen to purchase foreign currencies is that countries don't want to be seen overtly depressing the value of their currency and get labeled a "currency manipulator." The phrase "currency wars" was used back in 2010 when the Fed initiated QE2 (Jim Rickards wrote a book on this very topic).

Since it is generally accepted that a weaker currency is a boon for exporters, most industrialized nations want weak currencies as a means of exporting their way back to prosperity. However, if everyone adopts these weak-currency policies you get an actual currency war, with tit-for-tat policy decisions as one nation adopts new measures in response to another nation's. Already, certain individuals (like Jens Weidmann of the Bundesbank) are concerned Japan may be starting the next round of currency wars, and so with this in mind the Japanese have to be careful that their weak-yen policies don't raise the ire of the rest of the world.

You raise an interesting point, but the Japanese debt held domestically still constitutes an obligation of the government to pay the owner of the associated bond. So whether the bond is held domestically or not, the Japanese government will have to pay interest on it and return the principal upon maturity. That said, regardless of what debt metrics you use, I believe that Abe's weak-yen policies will continue out of necessity and this will erode the yen's status as a safe haven over time.

I certainly don't disagree with your statements pertaining to China. However, the crux of the piece was to highlight that Japan's economic situation will precipitate protracted, weak-yen policies. I believe this is bullish for gold because Japan's policy bias -- when it comes to yen valuation - will be detrimental to the currency's status as a safe haven. 2012 saw gold trade in tandem with risk assets while currencies like the dollar, franc, and yen continued to benefit from safe haven demand during bouts of risk aversion. While I may not have articulated this as effectively as I had hoped, the implications of Japan's current policy skew will compromise the yen's allure as a safe haven. As the economic tribulations facing these perceived safe haven currencies continue to pile up, gold should once again become a viable alternative. Not necessarily as a short-term parking lot for sidelined cash, but as a medium-to-long term buy and hold as investors wait out the pervasive uncertainty.

The problem with gold as a safe haven is that the advent of ETPs and other paper gold products have introduced a high degree of institutional cash and the associated volatility into the gold market. This price gyration will naturally cause investors to question the safety of allocating funds to gold amidst a flight to quality - especially with a brief time horizon. From a short-term standpoint, I personally wouldn't recommend gold supplant a cash position, but if one expects to be out of the market for an extended period of time they may want to consider allocating a portion of those funds to gold.

Great article, thanks for sharing. Besides of course the political reluctance in Germany, the article points out another component that will become an significant obstacle which is Merkel's desire for IMF involvement; however, it seems IMF participation may only be predicated on a debt restructuring that Europe's policymakers promised would be a one-off case with Greece. Throw in the Cypriot President's obstinacy when it comes to the privatization of state-owned assets and it seems we have the makings for a renewed risk-off environment as a Cypriot insolvency looms.

Thanks for your comment. I agree completely regarding your assessment about the varying shades of negative impact associated with a trade/current account deficit. The IMF piece I link to in the article above goes on at length discussing the various ways one can measure/interpret current accounts.

The points you make regarding imported gold are certainly accurate. More importantly, with a huge swathe of India's population without access to banks or traditional financial services, what other option do they have? This is a cultural reality that cannot be changed overnight via policy/tax manipulation.

However, I can also appreciate the Indian government's interest in trying to utilize this ultimately unproductive hoard of gold under mattresses and in closets across India. I cannot deny, as you said, that gold is an important store of wealth for Indian families - and to that effect, provides a liquid asset in times of need. That said, the gold merely sitting, collecting dust, could be more productively utilized within the Indian financial system (assuming of course the infrastructure was in place to facilitate such - which at the moment it is not).

So while I don't mean to submit that gold imports are bad, I will maintain that this capital allocated towards physically hoarded gold could be more productively utilized within the Indian economy if only the financial framework and cultural biases were appropriately positioned.

However, as I indicate in the piece, the Indian government is a long way from incorporating the necessary changes to wean its population off its dependence on gold. As such, I personally don't anticipate any paradigm shifts in Indian gold demand in the short-to-medium term. If anything, the Indian government will adopt import taxes and other myopic, short-term approaches to what will prove to be a protracted campaign against physical gold.

I don't disagree that India could penalize other imports, but no other import that I am aware of (besides oil) comes close to representing the percentage of the trade deficit that gold does. And if the rupee slides lower and gold continues to move higher, gold imports as a percentage of India's trade deficit will continue to balloon. Given the very real possibility of this development, the Indian government seems to be labeling gold as enemy number one and I doubt it can be persuaded to change course in favor of another policy crusade in the short-to-medium term (despite the cultural and structural obstacles that in my opinion will make the government's success near-impossible in that time frame).

While I agree that manipulating the overnight deposit rate lower is one of the few measures the Fed has left to try and coerce credit creation, the ECB adopted similar measures in July 2012 and the desired results never materialized. I haven't checked the broader metrics for European credit creation recently, but in the immediate and intermediate aftermath of the ECB's deposit rate cut, the bank reserves that were pulled out of the ECB's overnight facility were simply reallocated to the ECB's current account. So while the move did trigger some minor reallocation of bank reserves, the cash was merely shifted from one account to another - but still under the auspices of one of the ECB's deposit facilities. Again, I have to check current bank cash balances with the ECB, but I imagine if the move had elicited more robust loan growth in the months following the decision, then media and policymakers alike would be trumpeting their success...which as of yet hasn't been the case.

While the Fed may ultimately decide to take similar action, personally I would expect the measure to have the same ineffectual results as the ECB's. Besides the questionable success of a deposit rate cut, another major consideration of such a move is the effect it would have on U.S. based money markets. Many of these funds are already having a very difficult time offering positive yields to investors, and a deposit rate cut would complicate those efforts. If the Fed cuts deposit rates and US banks begin to move reserves away from the central bank, but do not use the funds to underwrite loans, most likely these banks will allocate the reserves to the very same securities preferred by money markets. This development would pressure yields on these securities lower and exacerbate the challenge for money market funds to provide palatable returns to investors.

So while I agree that a deposit rate cut remains one of the few remaining policy tools at the Fed's disposal, I am not so confident they will utilize such a move in the short-term given these considerations.

Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]

Unfortunately, I don't know off hand the percentage of non-delivery vs. delivery ETFs; if I had to venture a guess I would say its probably evenly split 50/50 - or perhaps the percentage is skewed a little higher in favor of the delivery-capable ETFs. While GLD has had an amazing degree of success, it seems the all the newly released ETFs have some mechanism in place for delivery. That doesn't inherently mean the gold is there, but my guess would be that the delivery-purveying ETFs are in greater numbers. In terms of dollars invested, I would assume the non-delivery ETFs are leading the pack. However, I can't say anything for sure without doing further research.

I can appreciate your point regarding gold prices being hindered by ETFs, but I do ultimately believe that investors will increasingly want to take direct delivery of their metal. Whether its Enron, MF Global, LIBOR rigging, or any one of a number of instances in which the financial system has displayed its proclivity for institutional favoritism, I think retail investors will become increasingly fatigued with the financial complex as a whole. This development would make direct ownership of unencumbered assets like gold increasingly attractive - rather than the proxy-ownership provided by ETFs, unallocated storage accounts, and the like. Time will tell, but I think the second leg of the gold bull market will be driven by physical demand as investors seek shelter from the uncertainty pervasive in broader financial markets. In our past conversations, we addressed that time conscientious investors prefer ETFs and similar vehicles, but I think a consistent erosion of investor confident in the financial system could reverse that preference.

Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]

Filipo,

you make an interesting allusion to the goldsmiths of the 17th century. Mark Skousan's book "The Economics of a Gold Standard" does a good job of covering the development of the goldsmith services and its evolution towards fractional reserve banking and the fiat currency system. The only difference is that many ETFs provide no delivery of any kind, so any concerns of a "run" are nonexistent. Shareholders liquidating shares would simply mean a rebalancing of the ETFs outstanding metals contracts (if they are indeed operating in this fashion) as opposed to a more difficult re-orientation of physical supply. So I can certainly appreciate your point and it's interesting to think about. I have also read that certain ETF structures, like GLD, are designed to be difficult to audit. This could facilitate whatever balance sheet chicanery they may or may not be perpetrating.

It's hard to say exactly how metals will respond. Traditionally, as a safe haven asset, and historically being subject to an inverse correlation with the US dollar, one would expect higher metal prices in the aftermath and associated dollar weakness of the US going over the fiscal cliff. Additionally, the economic contraction associated with the sequestration process would ensure Fed policy remains exceedingly loose, a positive for precious metals, as policymakers try to minimize the fallout.

however, 2012 has seen gold and other precious metals increasingly following the directional cues of risk assets, and as such we have frequently seen metal sell off amidst bouts of risk aversion. If this paradigm is still the primary driver of metal prices in the short-term, we could easily see metals selling off with the broader risk complex following a US cliff dive. However, even if this should be the case, I would imagine that metals would recover with a higher degree of resilience than equities and risk currencies following a cliff-driven correction - especially considering the low-rate and loose policy implications of going over the cliff.

Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]

The problem the Indian government and RBI face with regards to fighting inflation is that they are reluctant to substantially hike interest rates amidst a broader global slowdown. Emerging markets have to walk a fine line to balance slowing demand in their export destinations (i.e. US and Europe) and rising inflation as hot money from these low-rate environments (i.e. US and Europe again) are increasingly allocated towards higher yielding currencies and assets. Although this dynamic is not nearly as pronounced now as it was in 2010 when countries like Brazil had to significantly raise taxes on gains realized by foreigners on Brazilian bonds. However, I agree with you that if the Indian government made combating inflation a priority, rather than protecting its export industries, they could create more substantive demand for the Rupee via domestic deposits. Unfortunately, most emerging markets are stubbornly defending their export-oriented models rather than embracing domestic consumption (as was a main point made by this article).

If ETFs were not holding the metal, then your observations are certainly accurate. And maybe current price action while ETF holdings are purportedly at highs does have some implications in this regard. However, it seems unlikely that all the ETFs are playing the same game...and could get away with it...but either way I agree it is suspicious.

Thanks for your comment. I hesitate to make specific price prognostications due to the many ambiguous variables (especially any governmental response to gold prices in excess of $2,000/oz.). However, the outlook for gold remains bright and the Fed will ensure it stays that way for the foreseeable future...

That said, I would say that if we saw $5,000/oz gold, such a move would very likely drag silver along for the ride. Especially considering that the bulk of Americans have yet to take any position in precious metals - so if gold reaches $5,000 many of the middle-to-lower income investors that would eventually enter the market would probably prefer to purchase silver as the perception will be they're getting more "bang for their buck."

An additional consideration is that given the comparatively smaller volumes in the silver market, a large influx of capital could effect a more dramatic price spike than a similar cash inflow into the gold market. Given that much of the upper echelon of investors have taken their positions (in gold, silver, and the like), the subsequent deluge of investment following a gold price surge of this magnitude would probably represent medium-to-small investors that can be reasonably expected to prefer silver. So I would think its safe to say that silver would benefit from such a parabolic rise in the gold price.

Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]

It will certainly be interesting to see the new Basel III requirements unfold as they are..slowly..Incorporated into global banking procedures.

The gold confiscation exempted jewelry and "collectible" coins. However, there wasn't an explicit definition as to what constituted collectibles so its kind of nebulous what coins slipped under the wire. You're right about American jewelry generally having a lower gold content. I would say 14 and 18 carats is the most common gold content in American Jewelry.

Considering the dramatic slide the Rupee experienced against the dollar earlier this year, it makes sense that the Indian government wants to minimize gold ownership. Instead of holding the bulk of their wealth in gold, if Indians held cash Rupees it would create demand for the currency and shore up its valuation relative to other currencies.

You're certainly not along regarding your suspicions about the ETFs. I have read articles saying that the GLD prospectus specifically states it can substitute physical metal with paper contracts. I haven't sifted through the legalese myself, so I can't say that I have personally seen such language in GLD's prospectus, but certainly speculation abounds regarding their purported gold holdings. However, regardless of whether they're holding metal or not, the fact that investors have the perception that buying these shares is a de facto way of buying gold means that there is still substantial investor gold demand in the market. contrary to what recent price action would lead one to believe...

Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]

It will certainly be interesting to see how the implementation of Basel III plays out. It doesn't seem many believe it to be overly important - at least given the lack of media attention it has received. However, what I also meant regarding the new Basel III regulations is that I haven't seen any associated institution explicitly detail the fact that gold will be a tier 1 asset. have you? I have only seen these claims made in the newsletters and blogosphere.

With regards to Goldman Sachs' statements, I am constantly baffled by these analysts' decidedly oblivious approach to a healthier US economy. As I believe I have mentioned in past comments, the average maturity of total US debt is a mere 65 months or so. Literally trillions of dollars worth of debt will have to be rolled over in the next five years. Volcker-style rate hikes could have dire implications for the US' financing situation. Add this to the very real fact that we are at the end of a 30-year bull market in Treasuries and safe haven bonds, and the environment will be ripe for a bond selloff. If Treasury yields even go to their historical average (between 3-4% for the 10-year I believe), that would represent tens of billions (if not more) of dollars worth of additional debt servicing costs. As the percentage of tax revenues represented by debt servicing costs balloons, the US' borrower profile becomes increasingly unattractive adding additional upward pressure on Treasury yields. With this in mind, sluggish growth and a sustained low-rate environment are probably the best things for the US government as it (hopefully) determines a path to fiscal discipline and deficit/debt reduction. Considering all this, I don't necessarily think that a healthier US economy and rising interest rates would spell the end of the gold bull market.

I understand what you are saying regarding investors' sentiments not being dented by the 2011 correction in price, but you also have to realize that Americans were not allowed to own gold (with certain exemptions) between 1933-1975. We don't have the same cultural affinity for gold as many other cultures do. With this in mind, I don't think its unreasonable to think that investor confidence with regards to gold can be compromised by volatility and otherwise unexpected trading patterns. however you make a valid point regarding stocks and the fact that people keep coming back despite ever-rising volatility and uncertainty. Your similarly astute point regarding high gold price's enemy rings true, as many of my clients have espoused fears regarding "getting in at the top." Other than a damaged confidence in gold's safe haven aspects, what other reasons would you speculate could cause the correlation between gold and risk assets we have seen in 2012 (with the exception of recent trading)?

I agree that the current weakness in gold price seems out of place, but now that we're below the psychologically important $1,700 mark, technical selling pressure could push us lower. If we see consecutive closes below $1,680, I don't think its unreasonable to expect gold back in the $1,550-$1,600 range. Time will tell, but I think technical weakness combined with growing risk aversion as the fiscal cliff approaches could ultimately be bearish for gold in the immediate short-term (although you would intuitively assume gold should benefit from the current environment...). what is also strange about the current weakness in gold is that it happens despite record ETF holdings...go figure...